Udo Kappes, Head of P&C, Employee Lines, Reinsurance at Airbus Insurance Risk Management, and Chairman of the European Captive Insurance and Reinsurance Owners Association, talks about climate change underwriting.
Airbus and many other companies expressed their commitment to become CO2 neutral until 2050. Climate change and its implications are on almost all management agendas around the globe. How does climate change impact Captives?
Udo Kappes (UK): It impacts captives in many different ways. First of all it certainly has influence on the underwriting of certain risks, like for example NatCat exposures. The obvious change of frequency and severity of such events makes it necessary to have a much more holistic risk assessment and evaluation and finally will have an impact on the technical pricing. Secondly the governance of Captives must be reviewed in respect of whether it is always in line with the group`s governance rules. This framework is permanently changing and needs to be fully aligned. As an example, I just want to mention the investment strategy of a Captive, as long as it is separated from the group`s asset management. The Captive management will have to check whether the investment guidelines are always up to date and will sufficiently consider “green” investments.
On top of climate change topics, Captives had to manoeuvre through the pandemic crisis. Have captives been especially useful throughout the pandemic years?
Captives have been as useful during the pandemic years as before and after. Captives are strategic risk management tools which help to support their mother companies to optimize the placement of certain insurance programmes. This principle didn`t change in the pandemic years. The hardening market in several insurance lines had much more impact on Captives and will have an impact in the coming years. In the last two renewal periods we have seen drastic corrections from the insurance market. Such corrections are typically seen after several years of soft market cycles and at such an occasion the insurance market does not allow to achieve technical premium levels over a period of several years. Insurers instead use the hard market phase to increase the premiums to a level which is sometimes far above a technical premium level. This is the time when a Captive can demonstrate its value by increasing its capacity and to apply the technically calculated insurance premium.
Do you see concrete changes in the use of Captives?
First of all I see an increased interest of groups to create a Captive. We haven`t seen such a development since years. Now regulators in several Captive domiciles notice a significant increase in applications for new Captives. This is clearly a reaction to the hardening insurance market with significant premium increases, capacity reductions and coverage restrictions. I am convinced as well that existing Captives currently are assessing their capabilities to increase their capacities in order to support their groups. If this requires capital injections, the effect on programme renewals will be delayed, but this will change the underwriting then on the long term. So to answer clearly the question: yes, I expect changes in the use of Captives and the impact will be seen in the upcoming programme renewals.
What other parts of Captive use have changed, and how is this driving innovation?
Apart from market driven changes of Captive use, I see innovation coming from the Solvency II regulation. First of all, Solvency II led to an increased need to operate a Captive in a more active way than before. I just want to take one specific example: Diversification of underwriting! Captive capital can be used in a most efficient way if a good diversification in the underwriting can be achieved. This leads to more discussions about where a Captive can be used to support the underwriting. But there is another effect: a Captive can support the business initiatives of the group by launching discussions with the stakeholders of all kind of sales activities. The Captive can support insurance solutions which would not be possible in the traditional insurance market because there comparable risks are not available to have a sufficient portfolio of similar risks.
What changes have you seen and what trends are you noticing? What are your personal expectations for the coming years?
As already mentioned, I see a lot of activities in the captive area. Those activities are deriving from market developments on the one hand and on a more active management, which is a direct consequence of the Solvency II regulation.
In the near future I expect a significant increase in self-insurance solutions as a response to the hard insurance market. By the way, there will be other responses coming from the insureds, as a reaction to the shortage of capacity in certain insurance lines.
However, even if captives are expected to grow by numbers and in respect of market share, they still are by far not as large and complex as traditional insurance groups. It is therefore very important to notice that captives can be regulated proportionally. ECIROA and other captive organisations will not give up to achieve certain relief from not adequate regulatory requirements.